Well, it hailing here today. I just looked outside at what was coming down and it was hail. I lived in Florida for almost 15 years so I am familiar with it. Just rare to see this stuff in California. Probably means that it will snow at lower elevations in the Sierra’s. But we are not here to talk about the weather. We are here to talk about Keysight’s Earnings. This was the blandest call given that they just did a $1.6B acquisition and that will be the focus of much of what we talk about. But the numbers are straightforward. The company had $726M in Revenue and $0.63 per share earnings. If you switch to the non-GAAP number, they are essentially flat year over year. The company is profitable and stable. The market it is in is about the same. The question for you as an investor is all about the deal.
Let’s talk about using cash in acquisitions, especially since this is going to be borrowed cash. The borrowing does not bother me, but it does up the purchase price slightly. The thing is that Ixia shareholders (the shareholders of the company that Keysight is purchasing) are getting cash for their stock. There was a slight uptick in the stock prices of both Ixia and Keysight. Ixia’s share price is quite close to the offered cash value. That means people are pretty sure the deal will go through. The question is what does it mean to shareholders.
Now, the truth is that the PROFIT that Keysight derives from the deal must exceed the cost of the deal. Think of it this way. I give you $100 and you pay me back over time. I don’t make a profit until I get my $100 back from you. Revenue is not what you get to give me, it is profit. So, if you use that money to build a business that makes $10 a month, then I get my money back in 10 months at best. Ixia made $5.4M in profit last quarter. Even if I round this up to $6M, it will take over 250 quarters to pay back which is more than 60 years. As an investment, that is a terrible deal on the face of it.
The question comes down to what are called “synergies” and this is where acquisitions make it or break it. There are cost synergies and revenue synergies. The cost ones are easier to understand. You don’t need 2 CEOs. So, there are a number of people that will be let go once this deal is complete. At a minimum, that will include Executives and G&A (HR, Accounting, etc.). There may be other gains as well, but let’s stop there for the moment. Then there are revenue synergies. This is the notion that you can increase sales by selling one company’s products into the other’s customers. This is a lot riskier than cost synergies and is the place that most deals don’t work. I generally like to think that any revenue synergy is a bonus to the deal and that is the way it was discussed on the quarterly call.
So, what you should be looking for is if you take the P&L statement of both companies and add them together that the combined company beats that business. My experience is that it is a lot harder than it looks. Think of the Anite deal. Keysight spent $607M of shareholder money. Profits have not appreciably grown. So, what will be different this time? We shall see.
Have a great day!
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